Perception vs. Reality

Joe Cusick, Friday December 7

Perception vs. Reality that is the type of market we have right now. This week was filled with headline risk of an impending “Fiscal Cliff” event but as the week progressed the economic data, in the US and China, was better than expected and the mic grabbers on capital hill, who continue to trying to weigh on investor sentiment with their cautious rhetoric on a deal, were unable to rattle investor sentiment. This is a market that has held up and that is also in the face of Tech giant Apple under serious pressure. While the media wants to promulgate a perception of an impending cliff that is going to take the entire investment world down, the reality is investors are taking a more tempered, balanced approach. Get some rest this weekend and gear up for an exciting week.


 Market action was mixed into midday and not much had changed into the closing bell Friday. The economic data painted a murky picture after the Labor Department said the US economy added 146,000 jobs last month, which was significantly better than the 90,000 that was expected. The unemployment rate unexpectedly fell to 7.7 percent from 8 percent and hourly earnings rose .2 percent, double the expected. However, later, the Univ of Michigan said its index of consumer sentiment fell to 74.5 this month, from 82.7 and well below expectations of 82.4. Headlines that House Speaker John Boehner said no progress was being made on budget talks and that President Obama is doing a slow walk to the cliff seemed to weigh a bit on afternoon action. But, there wasn’t much volatility across financial markets. Crude oil slipped 19 cents to $86.07 and gold added $3.5 to $1705.30. On Wall Street, JP Morgan and Bank of American were the strongest components within the Dow and the industrial and the Dow added 18 points. However, a $14 drop on Apple weighed on the NASDAQ, which closed down 11.2 points.


TIVO added 12 cents to $12.10 and notched 52-week highs amid increasing options action. Roughly 17,000 calls and 2,685 puts traded on the stock. May $14 calls were the most actives and saw volume of 8,670 contracts against 1,249 in open interest. Barron’s Online Tech Daily blog had an article yesterday noting that Google and TIVO have a May court date related to a patent dispute. The focus on the May upside calls on TIVO might be a play on the favorable decision for the digital video recording device-maker. Jan 12.5 calls on TIVO were also busy today. 5,300 contracts traded.

Bullish trading was also seen in Walter Energy (WLT), Groupon (GRPN), and Marathon Petroleum (MPC).


Focus Media (FMCN) shares fell Friday, but finished well off session lows. The stock came under fire and hit a low of $22.58 after Reuters reported that private equity firm CDH has pulled out of a consortium that was looking to buy the Chinese online advertising company. Shares rebounded somewhat in the afternoon session and lost 63 cents to $24.12. On the options front, put volume outpaced call volume by a ratio of two-to-one after 42K puts and 21K calls traded in the name. December 22 puts, which expire in 2 weeks, were the most actives. More than 8,000 traded. Meanwhile, implied volatility in FMCN options was up 68 percent to 55.

Bearish trading was also seen in Owens Illinois (OI), Tellabs (TLAB), and MetroPCS (PCS).


Overall volumes in the index market were slow throughout the week and volatility was little changed. The S&P 500 Index (SPX) added 4.13 points to 1,418.07 Friday and after a very choppy week of trading finished up less than two points from a week ago. Meanwhile, CBOE Volatility Index (.VIX), which tracks the expected or implied volatility of SPX options, finished down .68 to 15.90 Friday. VIX was practically unchanged on the week. The index is sometimes called the market’s “fear gauge” because it moves higher during times of fear and anxiety on the Street. So far, there’s been little overall movement in the index in December and therefore few fiscal cliff fears reflected in the VIX index, for now.


SPDR Basic Materials (XLB), which has been among the worst performers among the 9 sector funds since the election along with the SPDR Energy Fund (XLE), edged 30 cents higher to $36.05 and more than 31,000 puts traded on the ETF Friday. Much of the flow was due to one spread trade this morning when an investor bought 8,000 January 35 puts on XLB for 69 cents and sold 16,000 January 32 puts at 14 cents. This 1X2 traded on the International Securities Exchange and data from ISE is indicating an opening purchase. That is, the investor bought 8,000 of the higher strike and sold 16,000 of the lower strike, setting up a bearish play that offers its best payoff is if shares fall to $32 over the next six weeks. The debit is at risk if share hold above $35 and the puts expire worthless, and there’s additional risk to the downside because not all of the lower strikes are covered by the higher strike puts.

Joe Cusick